12 January 2012 3:33 PM

Is Tesco's big share price drop a warning sign for a market crash?

The battering Tesco shares have taken as spooked investors ditched them can be taken as a clear warning that 2012 has the potential for a nasty stock market crash.

Tesco delivered a trading update that was poor in terms of UK sales. The supermarket giant is struggling in its own backyard, as consumers cut back and analysts have been sniping at its sliding like-for-like UK sales.

Despite those local troubles, Tesco has been consistently growing profits at a robust rate and that has kept its share price bobbing along. What did for it this morning was a hint of caution on that.

It said: ‘We expect Group trading profit growth to be around the low end of the current consensus range.’ And thus the shares of one of our most successful companies, that many were arguing was already undervalued, plunged 15 per cent.

But while that dive has made investors look up in shock, perhaps it shouldn’t be so surprising and might just be a canary in the coal mine.

There are a number of big red warning signs that have flashed up over the past year about how nervous investors are and yet the stock market is barely down on a year ago.The FTSE 100 has lost just six per cent over twelve months despite the awful economic year.

Over that period though there has been massive volatility and also alerts that we are in nervy times when shares could get seriously dumped.

These range from the summer’s near 20 per cent FTSE 100 plunge and the subsequent wild rollercoaster ride, to the widespread ditching of smaller companies, and were added to by figures this week showing investors pulling a record amount out of equity funds.

My big warning sign though is what has happened in day trading to companies that have issued a profits warning, or said they have refinancing issues. A genuine profits warning or debt issue has brought 40 per cent falls in some cases (see Thorntons, Game) or even bigger, such as Thomas Cook’s 75 per cent drop.But more importantly there has been hard beatings for what are judged to be quality or promising companies who said their profits would still rise - just by not as much as expected.

Admiral’s warning profits would be up at the lower end of consensus saw shares plunge 30 per cent, while Ocado predicted annual profits growth of 25 per cent and shares fell 17 per cent.

Tesco didn’t warn today that profits would fall, just that they would grow at the lower end of expectations. It said UK like-for-like sale were down 2.3 per cent, excluding VAT and fuel, which was below already gloomy forecasts, but at the same time its overseas growth in terms of total sales continued apace.

Fund managers and analysts keep telling us that the economic gloom doesn’t matter, company balance sheets are in a much stronger position than they were when the credit crunch hit and quality will shine through.

But Tesco, despite its current wobbles, is quality and shows no company is immune. If anything it talked itself down today. Its fundamentals are that of a solid, cash generating, blue-chip investment.

Revenue, profits, earnings per share and the dividend have grown in each of the past five years. Pre-tax profits in February 2011, were up 26 per cent on those in February 2008, over a three-year period in which its core customer – the UK consumer – has been hammered. For a genuine long-term investor, like a certain Mr Warren Buffet, that looks good.

But even Tesco can’t escape a dumping when it sounds a note of caution.

For me, that’s a further sign that the stock market is heavily at risk of a big slump this year – something a number of analysts and experts have been warning about. So-called permabear, Societie Generale’s Albert Edwards, said today he sees the financial crisis climaxing this year.The market warnings normally come with big picture talk of hard landings in China, eurozone debt crisis fallout and emerging market struggles with inflation.

I’d say an equally pertinent point is that over the short-term, whether company balance sheets are sound, good companies are cheap and quality will shine through or not, what matters when it comes to share prices is confidence.

And that is a commodity in very short supply right now, with both personal and institutional investors’ biggest concern being avoiding a rerun of their 2008 losses and thus likely to jump ship at the faintest hint of trouble.

I own Tesco shares, bought at a considerably higher price than where they are now. I still think it’s a very promising company with a long-term re-rating coming upwards not downwards. I won’t be ditching those shares, but I’d be reluctant to pile in and buy and hold more right now, just as I’d be very wary about taking a long position in equities overall.

A crash may not come - but the potential is definitely high.

Volatility may mean that the start of 2012 is a good time for trading, but for investors who’d be very unhappy at the prospect of losing 20 per cent in the next six months it’s probably not a good time for buy and hold.

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Comments

It would be nice to live in a Utopian pre 1980's high street like Steve suggests but unfortunately due to market and scale of economies the single specialty shops products prices would be too high.

This is especially true during this economic climate and if it weren't for the box stores with there global spending power and price wars with each other would mean a lot of the lower income families would struggle to feed their families at the moment.

The part-time comment is interesting as again at the moment isn't 100 part time people at least receiving some sort of wage better than 20-30 receiving a full time one in terms of survival?

It would be nice if this was an indication that the era of the big box stores is coming to an end and that the public were now ready to embrace a return to high street shops and single specialty shops like butchers and bakers. the social benefits would increase, derelict and junk shop fronts re-occupied, more employment and a better diversity of jobs, more working hours for people, the box stores are usually part time, therefore more money in an individuals pocket, this in turn increases the spending power and living standards of the populous. There is also an increase in public safety, firstly, there are less empty town centers for yobs to hang around in, trouble is more easily spotted and earlier, the values of yesteryear return, shopkeepers and shoppers become a community again, revenues remain in the community and so the cycle continues. the sooner that politicians catch up with this, the better we will be.

Tesco are not popular with the general public anymore because of their insatiable greed for taking up any little shop they can. We are swamped with Tesco stores in Peterborough and I know a lot of people who will not shop there because of this.
So nothing to do with market crash and everything to do with their greedy management.